Test bank fundamentals of corporate finance 9th edition chap011

sales price per unit minus the variable cost per unit.. As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at th

Project Analysis and Evaluation

Multiple Choice Questions

1 Forecasting risk is defined as the possibility that:

A some proposed projects will be rejected

B some proposed projects will be temporarily delayed

C incorrect decisions will be made due to erroneous cash flow projections

D some projects will be mutually exclusive

E tax rates could change over the life of a project

2 Scenario analysis is defined as the:

A determination of the initial cash outlay required to implement a project

B determination of changes in NPV estimates when what-if questions are posed

C isolation of the effect that a single variable has on the NPV of a project

D separation of a project's sunk costs from its opportunity costs

E analysis of the effects that a project's terminal cash flows has on the project's NPV

3 An analysis of the change in a project's NPV when a single variable is changed is called _ analysis

5 Variable costs can be defined as the costs that:

A remain constant for all time periods

B remain constant over the short run

C vary directly with sales

D are classified as non-cash expenses

E are inversely related to the number of units sold

6 Fixed costs:

A change as a small quantity of output produced changes

B are constant over the short-run regardless of the quantity of output produced

C are defined as the change in total costs when one more unit of output is produced

D are subtracted from sales to compute the contribution margin

E can be ignored in scenario analysis since they are constant over the life of a project

7 The change in revenue that occurs when one more unit of output is sold is referred to as:

9 By definition, which one of the following must equal zero at the accounting break-even point?

A net present value

B internal rate of return

C contribution margin

D net income

E operating cash flow

10 By definition, which one of the following must equal zero at the cash break-even point?

A net present value

B internal rate of return

C contribution margin

D net income

E operating cash flow

11 Which one of the following is defined as the sales level that corresponds to a zero NPV?

D operating cash flows

E net working capital

13 Which one of the following is the relationship between the percentage change in operatingcash flow and the percentage change in quantity sold?

17 Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:

A method of analysis used to make the decision

B initial cash outflow

C ability to recoup any investment in net working capital

D accuracy of the projected cash flows

E length of the project

18 Steve is fairly cautious when analyzing a new project and thus he projects the most optimistic, the most realistic, and the most pessimistic outcome that can reasonably be expected Which type of analysis is Steve using?

A determining how fixed costs affect NPV

B estimating the residual value of fixed assets

C identifying the potential range of reasonable outcomes

D determining the minimal level of sales required to break-even on an accounting basis

E determining the minimal level of sales required to break-even on a financial basis

20 Which one of the following will be used in the computation of the best-case analysis of a proposed project?

A minimal number of units that are expected to be produced and sold

B the lowest expected salvage value that can be obtained for a project's fixed assets

C the most anticipated sales price per unit

D the lowest variable cost per unit that can reasonably be expected

E the highest level of fixed costs that is actually anticipated

21 The base case values used in scenario analysis are the ones considered the most:

II sales price

III variable cost

IV sales quantity

A I only

B III only

C II and III only

D I and III only

E I, III, and IV only

23 When you assign the lowest anticipated sales price and the highest anticipated costs to a project, you are analyzing the project under the condition known as:

A best case sensitivity analysis

B worst case sensitivity analysis

C best case scenario analysis

D worst case scenario analysis

E base case scenario analysis

24 Which one of the following statements concerning scenario analysis is correct?

A The pessimistic case scenario determines the maximum loss, in current dollars, that a firm could possibly incur from a given project

B Scenario analysis defines the entire range of results that could be realized from a proposed investment project

C Scenario analysis determines which variable has the greatest impact on a project's final outcome

D Scenario analysis helps managers analyze various outcomes that are possible given

reasonable ranges for each of the assumptions

E Management is guaranteed a positive outcome for a project when the worst case scenario produces a positive NPV

25 Sensitivity analysis determines the:

A range of possible outcomes given that most variables are reliable only within a stated range

B degree to which the net present value reacts to changes in a single variable

C net present value range that can be realized from a proposed project

D degree to which a project relies on its fixed costs

E ideal ratio of variable costs to fixed costs for profit maximization

26 Assume you graph a project's net present value given various sales quantities Which one

of the following is correct regarding the resulting function?

A The steepness of the function relates to the project's degree of operating leverage

B The steeper the function, the less sensitive the project is to changes in the sales quantity

C The resulting function will be a hyperbole

D The resulting function will include only positive values

E The slope of the function measures the sensitivity of the net present value to a change in sales quantity

27 As the degree of sensitivity of a project to a single variable rises, the:

A less important the variable to the final outcome of the project

B less volatile the project's net present value to that variable

C greater the importance of accurately predicting the value of that variable

D greater the sensitivity of the project to the other variable inputs

E less volatile the project's outcome

28 Sensitivity analysis is based on:

A varying a single variable and measuring the resulting change in the NPV of a project

B applying differing discount rates to a project's cash flows and measuring the effect on the NPV

C expanding and contracting the number of years for a project to determine the optimal project length

D the best, worst, and most expected situations

E various states of the economy and the probability of each state occurring

29 Which type of analysis identifies the variable, or variables, that are most critical to the success of a particular project?

30 Simulation analysis is based on assigning a _ and analyzing the results

A narrow range of values to a single variable

B narrow range of values to multiple variables simultaneously

C wide range of values to a single variable

D wide range of values to multiple variables simultaneously

E single value to each of the variables

31 Which one of the following types of analysis is the most complex to conduct?

32 Ted is analyzing a project using simulation His focus is limited to the short-term To ease the simulation process, he is combining expenses into various categories Which one of the following should he include in the fixed cost category?

A production department payroll taxes

B equipment insurance

C sales tax

D raw materials

E product shipping costs

33 Which one of the following statements concerning variable costs is correct?

A Variable costs minus fixed costs equal marginal costs

B Variable costs are equal to fixed costs when production is equal to zero

C An increase in variable costs increases the operating cash flow

D Variable costs are inversely related to fixed costs

E Variable costs per unit are inversely related to the contribution margin per unit

34 Which of the following are inversely related to variable costs per unit?

I contribution margin per unit

II number of units sold

III operating cash flow per unit

IV net profit per unit

A I and II only

B III and IV only

C II, III, and IV only

D I, III, and IV only

E I, II, III, and IV

35 Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer

Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits Which one of the following represents the price that should be charged for the additional units during this sale?

A average variable cost

B average total cost

C average total revenue

D marginal revenue

E marginal cost

36 The president of Global Wholesalers would like to offer special sale prices to the firm's best customers under the following terms:

1 The prices will apply only to units purchased in excess of the quantity normally purchased

by a customer

2 The units purchased must be paid for in cash at the time of sale

3 The total quantity sold under these terms cannot exceed the excess capacity of the firm

4 The net profit of the firm should not be affected

5 The prices will be in effect for one week only

Given these conditions, the special sale price should be set equal to the:

A average variable cost of materials only

B average cost of all variable inputs

C sensitivity value of the variable costs

D marginal cost of materials only

E marginal cost of all variable inputs

37 The contribution margin per unit is equal to the:

A sales price per unit minus the total costs per unit

B variable cost per unit minus the fixed cost per unit

C sales price per unit minus the variable cost per unit

D pre-tax profit per unit

E aftertax profit per unit

38 Which of the following values will be equal to zero when a firm is producing the

accounting break-even level of output?

I operating cash flow

II internal rate of return

III net income

IV payback period

39 An increase in which of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used.

I annual salary for the firm's president

II contribution margin per unit

III cost of equipment required by a project

IV variable cost per unit

A I and III only

B I and IV only

C II and III only

D I, III, and IV only

E I, II, and IV only

40 Webster Iron Works started a new project last year As it turns out, the project has been operating at its accounting break-even level of output and is now expected to continue at that level over its lifetime Given this, you know that the project:

A will never pay back

B has a zero net present value

C is operating at a higher level than if it were operating at its cash break-even level

D is operating at a higher level than if it were operating at its financial break-even level

E is lowering the total net income of the firm

41 Given the following, which feature identifies the most desirable level of output for a project?

A operating cash flow equal to the depreciation expense

B payback period equal to the project's life

C discounted payback period equal to the project's life

D zero IRR

E zero operating cash flow

42 At the accounting break-even point, the:

A payback period must equal the required payback period

B NPV is zero

C IRR is zero

D contribution margin per unit equals the fixed costs per unit

E contribution margin per unit is zero

43 A project has a payback period that exactly equals the project's life The project is

operating at:

A its maximum capacity

B the financial break-even point

C the cash break-even point

D the accounting break-even point

E a zero level of output

44 Valerie just completed analyzing a project Her analysis indicates that the project will have

a 6-year life and require an initial cash outlay of $320,000 Annual sales are estimated at

$589,000 and the tax rate is 34 percent The net present value is a negative $320,000 Based

on this analysis, the project is expected to operate at the:

A maximum possible level of production

B minimum possible level of production

C financial break-even point

D accounting break-even point

E cash break-even point

45 A project has a projected IRR of negative 100 percent Which one of the following

statements must also be true concerning this project?

A The discounted payback period equals the life of the project

B The operating cash flow is positive and equal to the depreciation

C The net present value of the project is negative and equal to the initial investment

D The payback period is exactly equal to the life of the project

E The net present value of the project is equal to zero

46 Which of the following characteristics relate to the cash break-even point for a given project?

I The project never pays back

II The IRR equals the required rate of return

III The NPV is negative and equal to the initial cash outlay

IV The operating cash flow is equal to the depreciation expense

A I and III only

47 When the operating cash flow of a project is equal to zero, the project is operating at the:

A maximum possible level of production

B minimum possible level of production

C financial break-even point

D accounting break-even point

E cash break-even point

48 Which one of the following represents the level of output where a project produces a rate

of return just equal to its requirement?

49 Which of the following statements are identified with financial break-even point?

I The present value of the cash inflows exactly offsets the initial cash outflow

II The payback period is equal to the life of the project

III The NPV is zero

IV The discounted payback period equals the life of the project

A I and II only

B I and III only

C II and IV only

D I, II, and III only

E I, III, and IV only

50 You would like to know the minimum level of sales that is needed for a project to be accepted based on its net present value To determine that sales level you should compute the:

A contribution margin per unit and set that margin equal to the fixed costs per unit

B contribution margin per unit

C accounting break-even point

D cash break-even point

E financial break-even point

51 Theresa is analyzing a project that currently has a projected NPV of zero Which of the following changes that she is considering will help that project produce a positive NPV instead? Consider each change independently.

I increase the quantity sold

II decrease the fixed leasing cost for equipment

III decrease the labor hours needed to produce one unit

IV increase the sales price

A I and II only

B I and IV only

C II, III, and IV only

D I, II, and IV only

E I, II, III, and IV

52 You are considering a project that you believe is quite risky To reduce any potentially harmful results from accepting this project, you could:

A lower the degree of operating leverage

B lower the contribution margin per unit

C increase the initial cash outlay

D increase the fixed costs per unit while lowering the contribution margin per unit

E lower the operating cash flow of the project

53 Which one of the following characteristics best describes a project that has a low degree

of operating leverage?

A high variable costs relative to the fixed costs

B relatively high initial cash outlay

C an OCF that is highly sensitive to the sales quantity

D high level of forecasting risk

E a high depreciation expense

54 Which one of the following will best reduce the risk of a project by lowering the degree ofoperating leverage?

A hiring temporary workers from an employment agency rather than hiring part-time

production employees

B subcontracting portions of the project rather than purchasing new equipment to do all the work in-house

C leasing equipment on a long-term basis rather than buying equipment

D lowering the projected selling price per unit

E changing the proposed labor-intensive production method to a more capital intensive method

55 The degree of operating leverage is equal to:

A the percentage change in quantity divided by the percentage change in OCF

B the percentage change in sales divided by the percentage change in OCF

C 1 + FC/OCF

D 1 + VC/OCF

E 1 - (FC + VC)/OCF

56 Uptown Promotions has three divisions As part of the planning process, the CFO

requested that each division submit its capital budgeting proposals for next year These proposals represent positive net present value projects that fall within the long-range plans of the firm The requests from the divisions are $4.2 million, $3.1 million, and $6.8 million, respectively For the firm as a whole, Uptown Promotions is limited to spending $10 million for new projects next year This is an example of:

57 Brubaker & Goss has received requests for capital investment funds for next year from each of its five divisions All requests represent positive net present value projects All projects are independent Senior management has decided to allocate the available funds based on the profitability index of each project since the company has insufficient funds to fulfill all of the requests Management is following a practice known as:

A operating at the accounting break-even point

B operating at the financial break-even point

C facing hard rationing

D operating with zero leverage

E operating at maximum capacity

59 Precise Machinery is analyzing a proposed project The company expects to sell 2,100 units, give or take 5 percent The expected variable cost per unit is $260 and the expected fixed costs are $589,000 Cost estimates are considered accurate within a plus or minus 4 percent range The depreciation expense is $129,000 The sales price is estimated at $750 per unit, plus or minus 2 percent What is the sales revenue under the worst case scenario?

60 Precise Machinery is analyzing a proposed project The company expects to sell 2,100 units, give or take 5 percent The expected variable cost per unit is $260 and the expected fixed costs are $589,000 Cost estimates are considered accurate within a plus or minus 4 percent range The depreciation expense is $129,000 The sales price is estimated at $750 per unit, give or take 2 percent What is the contribution margin per unit under the best case scenario?

sensitivity analysis on the sales price using a sales price estimate of $755 What is the

operating cash flow based on this analysis?

63 Precise Machinery is analyzing a proposed project The company expects to sell 2,100 units, give or take 5 percent The expected variable cost per unit is $260 and the expected fixed costs are $589,000 Cost estimates are considered accurate within a plus or minus 4 percent range The depreciation expense is $129,000 The sales price is estimated at $750 per unit, give or take 2 percent The tax rate is 35 percent The company is conducting a

sensitivity analysis with fixed costs of $590,000 What is the OCF given this analysis?

64 Miller Mfg is analyzing a proposed project The company expects to sell 8,000 units, plus

or minus 2 percent The expected variable cost per unit is $11 and the expected fixed costs are

$287,000 The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range The depreciation expense is $68,000 The tax rate is 32 percent The sales price is estimated at $64 a unit, plus or minus 3 percent What is the earnings before interest and taxes under the base case scenario?

65 Miller Mfg is analyzing a proposed project The company expects to sell 8,000 units, plus

or minus 2 percent The expected variable cost per unit is $11 and the expected fixed costs are

$287,000 The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range The depreciation expense is $68,000 The tax rate is 32 percent The sales price is estimated at $64 a unit, give or take 3 percent What is the operating cash flow under the best case scenario?

66 Miller Mfg is analyzing a proposed project The company expects to sell 8,000 units, plus

or minus 2 percent The expected variable cost per unit is $11 and the expected fixed costs are

$287,000 The fixed and variable cost estimates are considered accurate within a plus or minus 5 percent range The depreciation expense is $68,000 The tax rate is 32 percent The sales price is estimated at $64 a unit, give or take 3 percent What is the net income under the worst case scenario?

or minus 5 percent range The depreciation expense is $26,000 The tax rate is 34 percent Thesales price is estimated at $7.50 a unit, plus or minus 4 percent What is the operating cash flow for a sensitivity analysis using total fixed costs of $31,000?

percent The sales price is estimated at $170 a unit, plus or minus 2 percent What is the contribution margin per unit for a sensitivity analysis using a variable cost per unit of $125?

69 Your company is reviewing a project with estimated labor costs of $21.20 per unit, estimated raw material costs of $37.18 a unit, and estimated fixed costs of $20,000 a month Sales are projected at 42,000 units over the one-year life of the project All estimates are accurate within a range of plus or minus 5 percent What are the total variable costs for the worst-case scenario?

72 A company is considering a project with a cash break-even point of 22,600 units The selling price is $28 a unit, the variable cost per unit is $13, and depreciation is $14,000 What

is the projected amount of fixed costs?

75 The Metal Shop produces 1.8 million metal fasteners a year for industrial use At this level

of production, its total fixed costs are $378,000 and its total costs are $522,000 The firm can increase its production by 5 percent, without increasing either its total fixed costs or its

variable costs per unit A customer has made a one-time offer for an additional 50,000 units at

a price per unit of $0.10 Should the firm sell the additional units at the offered price? Why or why not?

A yes; The offered price is less than the marginal cost

B yes; The offered price is equal to the marginal cost

C yes; The offered price is greater than the marginal cost

D no; The offered price is less than the marginal cost

E no; The offered price is greater than the marginal cost

76 Wexford Industrial Supply is considering a new project with estimated depreciation of

$26,000, fixed costs of $79,000, and total sales of $187,000 The variable costs per unit are estimated at $11.80 What is the accounting break-even level of production?

78 A project has an accounting break-even point of 15,329 units The fixed costs are

$382,000 and the projected variable cost per unit is $29.10 The project will require $780,000 for fixed assets which will be depreciated straight-line to zero over the project's 6-year life What is the projected sales price per unit?

81 The Motor Works is considering an expansion project with estimated annual fixed costs of

$71,000, depreciation of $38,500, variable costs per unit of $17.90 and an estimated sales price of $28 per unit How many units must the firm sell to break-even on a cash basis?

contribution margin per unit is $216.40 The company feels that it can realistically capture 2.5percent of the 110,000 unit market for this product The tax rate is 34 percent and the requiredrate of return is 11 percent Should the company develop the new product? Why or why not?

A Yes; The project's expected IRR exceeds the required rate of return

B Yes; The expected level of sales exceeds the required level of production

C No; The required level of production exceeds the expected level of sales

D No; The IRR is less than the required rate of return

E No; The project will never payback on a discounted basis

84 Tucker's Trucking is considering a project with a discounted payback period just equal to the project's life The projections include a sales price of $38, variable cost per unit of $18.50, and fixed costs of $32,000 The operating cash flow is $19,700 What is the break-even quantity?

87 Steele Insulators is analyzing a new type of insulation for interior walls Management has compiled the following information to determine whether or not this new insulation should bemanufactured The insulation project has an initial fixed asset requirement of $1.3 million, which would be depreciated straight-line to zero over the 12-year life of the project Projectedfixed costs are $742,000 and the anticipated annual operating cash flow is $241,000 What is the degree of operating leverage for this project?

90 What is forecasting risk and why is it important to the analysis of capital expenditure projects? What methods can be used to reduce this risk?

91 What are the key features of the accounting, cash, and financial break-even points?

92 Assume that a country experiences a financial crisis that causes the nation's financial markets to freeze in a manner that prevents a private firm from raising capital from any source Explain how project analysis conducted by that firm would work in this situation

93 Mr Bear, your boss, will only agree to accept a project that, as a minimum, provides a rate

of return equal to the requirement he has set for the project Given this, explain how you can use break-even analysis to ascertain which projects will be acceptable to him as you don't want to risk hearing him growl if you waste his time presenting him with a project that is unacceptable

Multiple Choice Questions

94 Cool Shades, Inc (CSI) manufactures biotech sunglasses The variable materials cost is

$1.69 per unit, and the variable labor cost is $3.04 per unit Suppose the firm incurs fixed costs of $750,000 during a year in which total production is 450,000 units and the selling price is $11.50 per unit What is the cash break-even point?

97 A project has a unit price of $5,000, a variable cost per unit of $4,000, fixed costs of

$17,000,000, and depreciation expense of $6,970,000 What is the accounting break-even quantity?

101 A proposed project has fixed costs of $36,000 per year The operating cash flow at 18,000 units is $67,000 What will be the new degree of operating leverage if the number of units sold rises to 18,500?

102 Consider a 6-year project with the following information: initial fixed asset investment =

$460,000; straight-line depreciation to zero over the 6-year life; zero salvage value; price =

$34; variable costs = $19; fixed costs = $188,600; quantity sold = 90,528 units; tax rate = 32 percent What is the sensitivity of OCF to changes in quantity sold?

34 percent Based on your experience, you think the unit sales, variable cost, and fixed cost projections given here are probably accurate to within 9 percent What is the worst case NPV?

104 McGilla Golf has decided to sell a new line of golf clubs The clubs will sell for $500 perset and have a variable cost of $200 per set The company spent $113,000 for a marketing study that determined the company will sell 58,000 sets per year for 7 years The marketing study also determined that the company will lose sales of 15,000 sets of its high-priced clubs The high-priced clubs sell at $700 and have variable costs of $300 The company will also increase sales of its cheap clubs by 9,000 sets The cheap clubs sell for $200 and have variablecosts of $100 per set The fixed costs each year will be $7,559,000 The company has also spent $1,133,000 on research and development for the new clubs The plant and equipment required will cost $21,000,000 and will be depreciated on a straight-line basis The new clubs will also require an increase in net working capital of $1,053,000 that will be returned at the end of the project The tax rate is 40 percent, and the cost of capital is 8 percent What is the IRR?

Additionally, the annual ownership costs (other than fuel) for the hybrid were expected to be

$420 more than the traditional model The EPA mileage estimate is 23 mpg for the traditional model and 25 mpg for the hybrid model Assume the appropriate interest rate is 10 percent, allcash flows occur at the end of the year, you drive 15,900 miles per year, and keep either car for 6 years What price per gallon would make the decision to buy they hybrid worthwhile?

106 In an effort to capture the large jet market, Hiro Airplanes invested $12.68 billion

developing its B490, which is capable of carrying 800 passengers The plane has a list price of

$275 million In discussing the plane, Hiro Airplanes stated that the company would even when 246 B490s were sold Assume the break-even sales figure given is the cash flow break-even Suppose the sales of the B490 last for only 9 years How many airplanes must Hiro Airplanes sell per year to provide its shareholders a 19 percent rate of return on this investment?

Chapter 11 Project Analysis and Evaluation Answer Key

Multiple Choice Questions

1 Forecasting risk is defined as the possibility that:

A some proposed projects will be rejected

B some proposed projects will be temporarily delayed

C incorrect decisions will be made due to erroneous cash flow projections.

D some projects will be mutually exclusive

E tax rates could change over the life of a project

Topic: Forecasting risk

2 Scenario analysis is defined as the:

A determination of the initial cash outlay required to implement a project

B determination of changes in NPV estimates when what-if questions are posed.

C isolation of the effect that a single variable has on the NPV of a project

D separation of a project's sunk costs from its opportunity costs

E analysis of the effects that a project's terminal cash flows has on the project's NPV.Refer to section 11.2

3 An analysis of the change in a project's NPV when a single variable is changed is called _ analysis

Topic: Sensitivity analysis

4 An analysis which combines scenario analysis with sensitivity analysis is called _ analysis

5 Variable costs can be defined as the costs that:

A remain constant for all time periods

B remain constant over the short run

C vary directly with sales.

D are classified as non-cash expenses

E are inversely related to the number of units sold

A change as a small quantity of output produced changes

B are constant over the short-run regardless of the quantity of output produced.

C are defined as the change in total costs when one more unit of output is produced

D are subtracted from sales to compute the contribution margin

E can be ignored in scenario analysis since they are constant over the life of a project.Refer to section 11.3

7 The change in revenue that occurs when one more unit of output is sold is referred to as:

Topic: Marginal revenue

8 The change in variable costs that occurs when production is increased by one unit is referred to as the:

9 By definition, which one of the following must equal zero at the accounting break-even point?

A net present value

B internal rate of return

Topic: Accounting break-even

10 By definition, which one of the following must equal zero at the cash break-even point?

A net present value

B internal rate of return

11 Which one of the following is defined as the sales level that corresponds to a zero NPV?

Topic: Financial break-even

12 Operating leverage is the degree of dependence a firm places on its:

A variable costs

B fixed costs.

C sales

D operating cash flows

E net working capital

13 Which one of the following is the relationship between the percentage change in operatingcash flow and the percentage change in quantity sold?

Topic: Degree of operating leverage

14 Bell Weather Goods has several proposed independent projects that have positive NPVs However, the firm cannot initiate any of the projects due to a lack of financing This situation

15 The procedure of allocating a fixed amount of funds for capital spending to each business unit is called:

Topic: Soft rationing

16 PC Enterprises wants to commence a new project but is unable to obtain the financing under any circumstances This firm is facing: